Posted by Merle E Woolley on June 01, 2001 at 07:06:24:
Thought perhaps my answers to the following email questions might be helpful to others. Probably won’t be answering anything for a couple of days … having a little knee surgery today. Copmuter is downstairs, bedroom upstairs.
Hope everyone has a GREAT day … TODAY!!
Merle
Hello Merle!
Thank you so much for getting back to me so quickly. I did a search on CREonline and found a slew of postings from you, but it’s a little too piecemeal for me right now. What I’d like to do is summarize my understanding of your system and hit you with a few questions along the way. My questions are in bold typeface. Thanks in advance for following along with me and taking the time to help a newbie.
As I understand it.
You borrow money from your investors at 9%.
Is this a 30-year note with a five-year balloon or simply an investment in the “Bank of Merle” earning 9% interest?
We sign a Promissory Note with interest only payments due each month for 5 years.
Do you make monthly payments to the investors or just act like a bank and keep track of their earnings for a later payout?
Monthly interest payments.
You then purchase houses for 80 to 85% of value in the $60,000 to $80,000 price range.
Do you stick with houses that need little or no repair?
Yes, we do occasionally buy one needing more than paint and cleaning, but we don’t pay as much. We adjust our estimate of market value by the cost of any additional repairs.
You then lease/option the houses at the full value of the house for 11% to folks who wouldn’t qualify for traditional financing. The term of their option is three years.
Since it’s a lease/option aren’t you just charging them rent and determining the rent based on a 30-year mortgage at 11% of the full value of the house?
Yes, it is rent. We do not always use 11%. These days, we look at cash flow. For example, we just did one at $86,900 w/ $2,500 down and payments of $865. Probably closer to 10.5%. We paid (and financed) $69,000 at 9%. Our payment, including taxes an insurance is $580 … leaves us $285 per month. If they exercise their option in exactly 3 years (which is not likely to be exact), we will make about $27,000. We can live with that.
Since you are still just technically renting to them, don’t you still have many of the headaches of a normal landlord?
No. They are responsible for all maintenance and upkeep.
They pay you a non-refundable option fee of $1,500.
At the end of three years (sometimes sooner) your tenant exercises his or her option, gets a traditional bank loan and cashes you out.Your profit comes from the $1,500 up-front fee, the spread between their monthly payment to you and your monthly payment to your investors over three years and the spread between the full value of the house paid to you and the balance you owe to your investors. I know that your investors typically want to repeat the cycle instead of cashing out, but do you offer to cash out your investors at the end of the three years or sit on the money for two more years?
If the buyer exercises their option, we must pay off the investor and they must sign a Deed of Release on the property. We ask them to sit one their money until we need it, thus we don’t have to pay interest until then.
What types of investments might your investors have had their money invested in that was earning them less than 9%?
CD’s, savings … anything they consider to be very safe. These are not “sophisticated” investors.
Are you now using your line of credit from the bank to buy most of your homes or are you still using mostly investors?
Investors
What interest rate does the bank charge you on your line of credit?
It’s locked in for 1 year at whatever prime is on the anniversary of the note.
How’s that for asking too many questions right out of the gate? I’ll be honest and tell you there will be more. I genuinely appreciate your time. Answer at your leisure. Thanks and God bless. Hi to Pat!